SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15(d) of the Securities ----- Exchange Act of 1934 for the quarterly period ended March 31, 1999. ______ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______. Commission File Number O-8092 OXIS INTERNATIONAL, INC. A Delaware corporation I.R.S. Employer Identification No. 94-1620407 6040 N. Cutter Circle, Suite 317 Portland, OR 97217 Telephone: (503) 283-3911 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- At March 31, 1999, the issuer had outstanding the indicated number of shares of common stock: 7,871,196 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31 ------------------------ 1999 1998 Revenues: Product sales $ 1,406,000 $ 1,296,000 Royalties and license fees 50,000 51,000 ----------- ----------- Total revenues 1,456,000 1,347,000 Costs and expenses: Cost of sales 1,007,000 1,259,000 Research and development 770,000 931,000 Selling, general and administrative 858,000 981,000 ----------- ----------- Total costs and expenses 2,635,000 3,171,000 ----------- ----------- Operating loss (1,179,000) (1,824,000) Interest income 18,000 11,000 Interest expense (30,000) (27,000) ----------- ----------- Net loss (1,191,000) (1,840,000) Other comprehensive income (loss) - Foreign currency translation adjustments 12,000 (59,000) ----------- ----------- Comprehensive loss $(1,179,000) $(1,899,000) =========== =========== Net loss per share - basic and diluted $ (.15) $ (.32) =========== =========== Weighted average number of shares used in computation - basic and diluted 7,845,926 5,734,778 =========== ===========
1 CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1999 1998 (Unaudited) ASSETS Current assets: Cash and cash equivalents $1,483,000 $ 2,575,000 Accounts receivable 1,117,000 992,000 Inventories 1,565,000 1,576,000 Prepaid and other 490,000 258,000 ---------- ----------- Total current assets 4,655,000 5,401,000 Property and equipment, net 858,000 2,817,000 Technology for developed products and custom assays, net 2,382,000 2,570,000 Other assets 324,000 380,000 ---------- ----------- Total assets $8,219,000 $11,168,000 ========== ===========
2 CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1999 1998 (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 724,000 $ 724,000 Accounts payable 563,000 716,000 Accrued payroll, payroll taxes and other 705,000 820,000 Current portion of long-term debt 48,000 111,000 ------------ ------------ Total current liabilities 2,040,000 2,371,000 Long-term debt due after one year 174,000 1,613,000 Shareholders' equity: Preferred stock - $.01 par value; 15,000,000 shares authorized: Series B - 428,389 shares issued and outstanding at March 1999 (liquidation preference of $1,000,000) 4,000 4,000 Series C - 807,878 shares issued and outstanding at March 31, 1999 8,000 8,000 Common stock - $.001 par value; 95,000,000 shares authorized; 7,871,196 shares issued and outstanding at March 31, 1999 8,000 8,000 Additional paid in capital 52,754,000 52,754,000 Accumulated deficit (46,494,000) (45,303,000) Accumulated translation adjustments (275,000) (287,000) ------------ ------------ Total shareholders' equity 6,005,000 7,184,000 ------------ ------------ Total liabilities and shareholders' equity $ 8,219,000 $ 11,168,000 ============ ============
3 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ---------------------------- 1999 1998 Cash flows from operating activities: Net loss $(1,191,000) $(1,840,000) Adjustments to reconcile net loss to cash used for operating activities: Depreciation and amortization 289,000 362,000 Gain on sale of land and building (16,000) -- Changes in assets and liabilities: Accounts receivable (130,000) 784,000 Inventories -- (47,000) Prepaid and other current assets (233,000) 31,000 Accounts payable (145,000) (262,000) Accrued payroll, payroll taxes and other (96,000) 136,000 ----------- ----------- Net cash used for operating activities (1,522,000) (836,000) Cash flows from investing activities: Proceeds from sale of land and building 1,959,000 -- Purchases of equipment (25,000) (10,000) Additions to other assets (24,000) (58,000) Other, net (1,000) (13,000) ----------- ----------- Net cash provided by (used for) investing activities 1,909,000 (81,000) Cash flows from financing activities: Proceeds from issuance of notes -- 546,000 Stock issuance costs -- (28,000) Repayment of short-term borrowings -- (424,000) Repayment of long-term debt (1,502,000) (20,000) ----------- ----------- Net cash provided by (used for) financing activities (1,502,000) 74,000 Effect of exchange rate changes on cash 23,000 (37,000) ----------- ----------- Net decrease in cash and cash equivalents (1,092,000) (880,000) Cash and cash equivalents - beginning of period 2,575,000 1,290,000 ----------- ----------- Cash and cash equivalents - end of period $ 1,483,000 $ 410,000 =========== ===========
4 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENTS AND CONDENSED NOTES The unaudited consolidated financial statements, which have been prepared in accordance with the instructions to Form 10-Q, do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. All adjustments considered necessary by management for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. An annual report (Form 10-K/A) has been filed with the Securities and Exchange Commission ("Commission") for the year ended December 31, 1998. That report contains, among other information, a description of the Company's business, audited financial statements, notes to the financial statements, the report of the independent auditors and management's discussion and analysis of results of operations and financial condition. Readers of this report are presumed to be familiar with that annual report. 2. INVENTORIES Inventories are stated at the lower of cost or market. Cost has been determined by using the first-in, first-out method. Inventories at March 31, 1999 and December 31, 1998, consisted of the following:
March 31, December 31, 1999 1998 Raw materials $ 867,000 $ 817,000 Work in process 325,000 406,000 Finished goods 373,000 353,000 ---------- ---------- Total $1,565,000 $1,576,000 ========== ==========
3. OPERATING SEGMENTS The following table presents information about the Company's two operating segments: 5
Health Therapeutic Products Development Total -------- ----------- ----- Quarter ended March 31, 1999: Revenues from external customers $1,428,000 $ 28,000 $ 1,456,000 Intersegment revenues -- 24,000 24,000 Segment loss (409,000) (782,000) (1,191,000) As of March 31, 1999 - Segment assets 5,885,000 2,334,000 8,219,000 Quarter ended March 31, 1998: Revenues from external customers $1,347,000 $ -- $ 1,347,000 Intersegment revenues -- 29,000 29,000 Segment loss (962,000) (878,000) (1,840,000) As of March 31, 1998 - Segment assets 8,211,000 2,239,000 10,450,000
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's working capital decreased during the first quarter of 1999 by $415,000, from $3,030,000 at December 31, 1998 to $2,615,000 at March 31, 1999. The reduction in working capital resulted primarily from the effect of the net loss for the quarter ($1,191,000 less non-cash charges of $289,000), offset by a $543,000 net increase in working capital from the sale of land and buildings and payment of related debt. Cash and cash equivalents decreased from $2,575,000 at December 31, 1998 to $1,483,000 at March 31, 1999. While the Company believes that its new therapeutic products and technologies show considerable promise, its ability to realize significant revenues therefrom is dependent upon the Company's success in developing business alliances with biotechnology and/or pharmaceutical companies that have the required resources to develop and market certain of these products. There is no assurance that the Company's effort to develop such business alliances will be successful. The Company expects to continue to report losses in 1999 as the level of expenses is expected to continue to exceed revenues. The Company can give no assurances as to when and if its revenues will exceed its expenses. New revenue sources or additional capital will be required during 1999 for the Company to continue operating in accordance with its current plans. Failure to either generate new revenue sources or to raise additional capital would cause the Company to severely curtail or cease operations. INFORMATION SYSTEMS AND THE YEAR 2000 As is the case with most other companies using computers in their operations, the Company is in the process of addressing the Year 2000 problem. The Company has reviewed most of its computer hardware and software to determine whether they will consistently and properly recognize the Year 2000. Certain of the Company's systems include hardware and packaged software recently purchased from vendors who have represented that these systems are already Year 2000 compliant. Other hardware and software currently being used by the Company has been identified by the Company as not being Year 2000 compliant, particularly certain packaged software used in the Company's accounting systems. The Company is in the process of upgrading that software to year 2000 compliant versions. If the Company were unable to replace software and hardware to make its accounting and manufacturing systems Year 2000 compliant, the Company believes that it could implement manual systems to carry out its business without significant interruption. 7 The Company expects to complete its review of all of its systems, including embedded technology in non-information technology systems, which might be affected by the Year 2000 issue by the second quarter of 1999. The Company has reviewed or is reviewing communications, security, and environmental monitoring and control systems as well as certain laboratory and manufacturing equipment and equipment manufactured for customers. The Company believes that, in the worst likely case, such systems or components thereof can be replaced to make such systems Year 2000 compliant. The Company expects that the total cost for upgrades and replacements of software, older computer hardware and other systems or components including embedded technology that might be affected by the Year 2000 issue will not exceed $100,000. The Company relies on a number of vendors and suppliers including banks, telecommunications providers, transportation companies and other providers of goods and services. The inability of certain of these third parties to conduct their business for a significant period of time due to the Year 2000 issue could have a material impact on the Company's operations. The Company does not have the resources to determine whether all such vendors and suppliers are Year 2000 compliant. However, the Company expects that it could find other vendors and suppliers if any of its current vendors or suppliers are unable to continue to provide goods or services to the Company, but no assurances can be given as to how long it will take to find substitute vendors and suppliers. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1998 REVENUES The Company's revenues for the quarters ended March 31, 1999 and 1998 were as follows: 1999 1998 Diagnostic and research assays $ 848,000 $ 416,000 Instrument sales and development 487,000 810,000 Other 121,000 121,000 ---------- ---------- $1,456,000 $1,347,000 ========== ========== Sales of the Company's diagnostic and research assays increased from $416,000 in the first quarter of 1998 to $848,000 in the first quarter of 1999. This increase of $432,000 was primarily due to increased sales volumes to the Company's distributors in the first quarter of 1999, following below normal sales volumes in the first quarter of 1998. 8 Revenue from instrument sales and development declined by $323,000, from $810,000 in the first quarter of 1998 to $487,000 in the first quarter of 1999. This decrease resulted from reduced orders from certain customers for whom the Company acts as an original equipment manufacturer. COSTS AND EXPENSES Including amortization of purchase adjustments, cost of sales was 97% of product sales for the first quarter 1998 and decreased to 72% of product sales for the first quarter of 1999. This decrease in the cost of sales as a percentage of sales is due primarily to the effect of the fixed manufacturing costs for the Company's research and diagnostic assays being spread over manufacturing and sales volume for the first quarter of 1999 which was approximately double that of the first quarter of 1998. Cost of sales of research and diagnostic assays in the first quarter of 1999 were $40,000 less than in the first quarter of 1998, despite an increase in volume. Cost of sales for the Company's instrument sales and development business also declined, by $260,000 due primarily to lower sales volumes. Costs of sales in the first quarter of both 1998 and 1999 includes approximately $210,000 in amortization of purchase adjustments relating to 1994 and 1997 business acquisitions. Excluding such amortization the cost of product sales for the first quarter of 1998 was approximately 81% of product sales and the cost of sales for the first quarter of 1999 was approximately 57% of product sales. Research and development expenses decreased from $931,000 in the first quarter of 1998 to $770,000 in the first quarter of 1999. The decrease in research and development expenses resulted from cost reductions in the first quarter of 1999 compared to the first quarter of 1998 of (1) $30,000 for outside development contracts primarily relating to the development of the Company's lead molecule, BXT-51072, which is currently in Phase II clinical trials for ulcerative colitis, (2) $33,000 in research and development costs of the Company's French subsidiary and (3) $98,000 in research and development costs in the United States other than the costs of clinical trials. Research and development expenses in the first quarter of 1998 included severance costs relating to a staff reduction in the United States. During the first quarter of 1999 the Company decided to reduce its research and development costs by closing its French research laboratory. Substantially all research and development activities carried on by the Company's French subsidiary were ceased in early 1999. The lease of the French subsidiary's facility was not renewed when it terminated at the end of April 1999. Research and development costs of the French subsidiary decreased from $422,000 in the first quarter of 1998 to $389,000 in the first quarter of 1999. Costs in the first quarter of 1999 include severance costs for approximately half of the French employees. The remainder of the employees, who are involved in the final closure of the operations, are expected to be terminated during the second quarter of 1999. 9 Selling, general and administrative expenses decreased from $981,000 in the first quarter of 1998 to $858,000 in the first quarter of 1999. The decrease is primarily the result of reductions in selling, general and administrative expenses of OXIS' instrument business in the first quarter of 1999 as compared to 1998. The cost reductions resulted from the consolidation of certain sales and administrative functions of OXIS' instrument business with those of its assay and other health products business. NET LOSS The Company continued to experience losses in the first quarter of 1999. The first quarter 1999 loss of $1,191,000 ($.15 per share-basic and diluted) was $649,000 less than the $1,840,000 ($.32 per share-basic and diluted) loss for the first quarter of 1998. The decrease in the net loss is primarily due to the increase in gross margin from product sales and decreases in research and development and selling, general and administrative costs. The Company expects to incur a substantial net loss for 1999. If the Company develops substantial new revenue sources or if substantial additional capital is raised through further sales of securities (See Financial Condition, Liquidity and Capital Resources), the Company plans to continue to invest in research and development activities and incur sales, general and administrative expenses in amounts greater than its anticipated near-term product margins. If the Company is unable to raise sufficient additional capital or to develop new revenue sources, it will have to cease, or severely curtail, its operations. In this event, while expenses will be reduced, expense levels, and the potential write down of various assets, would still be in amounts greater than anticipated revenues. __________________________ Certain of the matters discussed in this Report such as management's plans regarding research and development activities and the continuation of its current business plans are forward-looking statements that involve risks and uncertainties, including the Company's ability to raise additional financing, its ability to enter into alliances, the timely development and market acceptance of new products, the impact of competitive products and pricing, economic conditions, and other risks. These factors could cause actual results to differ materially from those described in any forward- looking statements. 10 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits - See Exhibit Index on page 12. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OXIS International, Inc. May 13, 1999 By /s/ Ray R. Rogers ----------------------------- Ray R. Rogers Chairman and Chief Executive Officer May 13, 1999 By /s/ Jon S. Pitcher ----------------------------- Jon S. Pitcher Chief Financial Officer 11 EXHIBIT INDEX Exhibit Number Description of Document 10(a) Agreement of Sale dated December 2, 1998 10(b) Sublease Agreement dated February 19, 1999 10(c) Rider to Sublease Agreement dated February 19, 1999 27(a) Financial data schedule 12